Is it time for Hong Kong to overhaul its tax collection methods? Multi million dollar losses suggest it is.
The article, ‘Expat Trapped in Hong Kong over unpaid tax bill’ that appeared in last week’s issue of The Sunday Morning Post highlighted an interesting problem for the Hong Kong Inland Revenue Department.
The piece tells the story of an unemployed expatriate blocked from leaving Hong Kong until he settles his outstanding tax bill. Due to the rules that govern the issue of work visas in Hong Kong, the man in question needed a confirmed job offer to obtain the work visa that would ultimately enable him to earn the funds required to pay his outstanding bill. Having finally secured a firm offer of employment following fruitless months of job seeking hampered by his lack of legal right to work, the man has now been advised that he cannot accept the position; his breach of his conditions of stay in the territory the result of not extending his original visa – something which the man claims he couldn’t financially afford to do because he didn’t have a job.
The current position with regard to an employee that plans to leave Hong Kong is that the employer is required to give the Commissioner of Inland Revenue at least one month’s notice of an employee ceasing to be employed in Hong Kong. Similarly, if the employee is about to leave Hong Kong for a period exceeding one month including a permanent departure, other than in the course of his employment, the employer is required to give the Commissioner one month’s notice of the individual’s departure date. In the case of a person permanently leaving Hong Kong the employer is also required to withhold any payment due within one month prior to the departure, unless told otherwise by the Commissioner, in order to settle any Hong Kong tax due.
If there are reasonable grounds to believe that a person is about to leave Hong Kong without paying all taxes due, an officer of the Department of the Inland Revenue holding the rank of Chief Assessor or above may apply to a District Judge to issue a ‘departure prevention direction’, following which the individual may not leave until the Inland Revenue Commissioner is satisfied that the arrears will be or have been paid.
The same basic procedure applies to a person carrying on a business in Hong Kong as the Inland Revenue Ordinance requires the taxpayer to give the Inland Revenue Department one month’s notice of the cessation of business.
The Inland Revenue Department does have some protection due to the fact that tax is collected on a current year basis through the assessment and collection of provisional tax.
For example:
An individual tax return for 2009 would have been issued at the beginning of May 2009 with the individual given one month to submit the completed return. Around September/October 2009, the Inland Revenue Department will issue an assessment in respect of the final tax due for 2008/2009 and provisional tax for 2009/2010.
The assessment will indicate two payment dates. The first being around the beginning of January 2010 in respect of the balance of tax due for 2008/2009, if any, and 75% of the provisional tax due for 2009/2010. The second payment, due around April 2010, is for the residual 25% of the provisional tax assessed for 2009/2010. Because no tax return has been filed for 2009/2010, the income assessed for 2009/2010 is based on the 2008/2009 income already filed. Provision is made for the holdover of tax where the anticipated income for the current year is likely to be less than 90% of the income assessed for the previous year.
Hence, a person able to leave Hong Kong having not paid their tax arrears or leaving before the due date for payment of their final tax for the previous year and provisional tax for the current year will be a creditor of the Hong Kong Government, and will escape his tax obligation.
However, if the taxpayer should return and the Department has issued a ‘departure prevention direction’, the Immigration Department will detain the taxpayer on his return to Hong Kong.
The Sunday Morning Post article states that Hong Kong’s Inland Revenue Department has lost HK$140 million from the non-collection of taxes from people leaving Hong Kong during the past five years. This could have been avoided in several ways such as, for example, by accelerating the collection of provisional tax to say June/September as opposed to the following January/March which would no doubt cause uproar by requiring the prepayment of tax on income not yet earned. Alternatively, another option would be to adopt a ‘pay-as-you-earn’ tax collection method whereby taxpayers pay tax on their monthly income based on an estimated cumulative liability for the year of assessment. By doing so the Commissioner of Inland Revenue would not have to go to extreme lengths to prevent the departure of delinquent taxpayers, which are clearly not very successful.
